The coming months are critical for the future of Europe. Jobs and business investment – in Britain and across the euro area – depend on Europe's leaders choosing the right course.
The risk is that Europe gets locked into a false choice between growth and deficit reduction. The truth is that we need the right combination of both – action now to get Europe's economies growing and creating jobs, tough medium-term action to get public finances back into shape and a long-term strategy for increasing the continent's productivity and skills base.
It is true that the two of us disagreed on the case for British membership of the single currency. We agree, however, that the single currency needs to survive and succeed – and we are worried that Europe has so far identified only half the solution. There is a real danger that binding countries into ever larger cuts and tax rises to meet the new structural deficit and debt targets will become self-defeating, economically and politically.
A collective strategy that is choking off demand is compounding Europe's problems – just as it has done in Britain, where our economic recovery has stalled. Investors are now worrying that the policy mix has become unbalanced, to the detriment of economic recovery. We need a new strategy that permits a more sustainable approach to debt reduction through growth and long-term fiscal responsibility.
Growth needs the demand that comes with reviving confidence. Many European companies and consumers are struggling under a heavy burden of debt and deleveraging. But many also lack the confidence to spend and invest, because they see an uncertain future.
Countries cannot duck tough decisions on tax and spending, but nor can they ignore the vital need for economic growth if deficits are to be brought down successfully and in a fair way. That is why Europe now urgently needs a plan for growth.
At the heart of Europe's problems is the fact that the eurozone does not have the institutions or political machinery to project confidence in its own future. So, first, it needs a new political settlement.
It needs a European central bank that is willing explicitly to stand in the way of sovereign contagion from the periphery. It needs an active European stability mechanism that can meaningfully support short-term sovereign liquidity and the recapitalising of the European banking system. And it needs a system of collective economic decision-making among eurozone countries that ensures everyone plays by the rules. That is why we have both argued that some form of greater fiscal union is now inevitable.
But those rules need to recognise that Germany's persistent current account surplus undermines the currency bloc as much as Greece's debts and political stalemate or Spain's current account deficit. And it needs a clear acceptance by Germany that it faces a period of above-eurozone-average wage rises and inflation in order to fix the imbalance. This means challenging a basic view of the eurozone in Germany, but the German finance minister, Wolfgang Schäuble, is already recognising this must happen.
Second, Europe needs to boost public investment in the demand that will help to drive growth, as the European commission is now urging. A serious capital lift for the European Investment Bank is desirable, to help to provide fresh sources of infrastructure investment, as are infrastructure bonds, which help to counter a failing private appetite for large-scale project finance. Unused structural funds must also be recycled into new programmes, and into investment projects that help the weaker eurozone states to connect better with the large markets of northern Europe.
Third, in the longer term, growth will depend on structural reforms, so that struggling eurozone countries become more competitive. Europe needs to raise economic participation rates, make it easier for businesses to grow and take on workers, improving competition in some product markets, and improve its skills base.
These reforms were set out in the Europe 2020 plan. They need to be genuinely owned by European governments who – like the best and most innovative of the American states – should be watching and learning from each other in testing new approaches and defining best practice.
And Britain's role and place in this process? It should be at the centre, bringing its own experience in banking reform and labour and product market reform to the table, irrespective of the fact that it is not in the eurozone. The reality is that there is no bad outcome for the eurozone that is not a bad outcome for Britain. So this is a perilous time for the British government to be increasingly isolated and politically disengaged.
Britain should be influencing the debate on the future of Europe, not locked out of the room where the big decisions will inevitably be taken on issues that directly affect our economic interests. We would not simply be doing our European neighbours a favour by making the case for sustainable growth and playing our part in a revived European economy. We would be securing our own economic future.
Ed Balls is the former secretary for children, schools and families and MP for Morley and Outwood. Peter Mandelson is a British Labour party politician who has previously been first secretary of state; secretary of state for business, innovation and skills; and president of the board of trade